Prospects for Free Trade in the Global Economy

Free trade involves 2 countries having the ability to exchange goods and services without tariffs.

Advantages and Benefits of Free Trade.

1. Law of comparative advantage states that if countries specialise in producing goods where they have a lower opportunity cost then they will be a net gain to both the exporter and importing country. Consumers will benefit from lower prices and exporting firms will have more markets to sell to, creating jobs and output.

2. Increased trade will increase in competition. A firm like British Steel who used to have a domestic monopoly will now face competition from abroad. This increased competitiveness should provide incentives for domestic monopolies to cut costs and be more efficient.

3. Free trade enables economies of scale. Firms can specialise in producing goods and get various different economies of scale such as bulk buying and specialisation.

4. Countries can make use of raw materials. e.g. saudi arabia can export oil and import goods.

5. Look at how bad the common agricultural policy is.


However despite the advantages of free trade, politicians often highlight the disadvantages of free trade. IN particular these disadvantages are often focused on a small sector of the economy, but, this sector may be highly vocal and politically powerful leading to tariffs being maintained

Arguments Against Free Trade.

Some domestic firms will lose out and go out of business creating unemployment which may be hard to reduce.

Infant Industry Argument. This states that developing countries need protection to enable the industry to develop. In the beginning they will not have economies of scale, they may not have skilled labour. Protection enables them to get foothold and the hope is that they can reduce over time. This is a good argument for developing countries but not for developed countries. This is why people often say free trade is biased towards rich countries.

Diversification. Countries comparative advantage may lie in primary products. But, it is good to diversity to reduce risk of concentrating on one good.

Environment. Free trade enables countries to exploit weak environmental laws elsewhere.

Free trade has always been a contentious issue. It appears that many non economists remain unconvinced over its merits